Why the U.S. Government Banned Investing in Gold from 1933 Until 1974. And Could It Happen to Bitcoin Today? (#93 - 12 April 2022)

Dear Friends,?

Today we’ll look back in time at one of the most significant events in the modern history of money: FDR’s 1933 ban on gold ownership within the United States.

What catalysed this decision? What was the broader impact? And could something like this ever happen again, especially with regards to Bitcoin?

Make sure to subscribe (and join the 49,000+ others who have done so) to receive your Future of Money newsletter in your inbox every week!?

If you enjoy this content, you will also love what I post on Twitter (@HenriArslanian) and the library of videos on my YouTube channel.

Here we go!

Powered by Celsius

Why the U.S. Government Banned Investing in Gold from 1933 Until 1974. And Could It Happen to Bitcoin Today?

A major milestone in the history of money took place 89 years ago last week.

On April 5, 1933, U.S. President Franklin Delano Roosevelt signed Executive Order 6102, which forbade “the hoarding of gold coins, gold bullion, and gold certificates within the continental United States.”

Source: Getty Images

As families and businesses all over America struggled to climb out of the depths of a rapidly-ballooning financial crisis in the wake of the 1929 stock market crash, FDR attempted to dramatically increase federal spending so as to stimulate the economy.

However, his hands were tied by the Federal Reserve Act of 1913, which mandated that each banknote had to be backed by 40% of gold held in federal reserves.?

So for every dollar printed, the government would need to hold 40 cents equivalent of gold.

But foreign and domestic holders of U.S. currency were rapidly losing faith in paper money and were redeeming dollars at an alarming rate for gold.

In order to slow the process, FDR declared a "national emergency" and ordered all banks to close over a four-day span in March 1933 so as to prevent “the export, hoarding, or earmarking of gold or silver coin or bullion or currency.”

The terms of the presidential proclamation specified that “no such banking institution or branch shall pay out, export, earmark, or permit the withdrawal or transfer in any manner or by any device whatsoever, of any gold or silver coin or bullion or currency or take any other action which might facilitate the hoarding thereof; nor shall any such banking institution or branch pay out deposits, make loans or discounts, deal in foreign exchange, transfer credits from the United States to any place abroad, or transact any other banking business whatsoever.”

Source: The New York Times

For that entire week, Americans would have no access to banks or banking services. They could not withdraw or transfer their money, nor could they make deposits.

One month later, an executive order made private gold possession illegal.?

All Americans were required to turn in their gold on or before May 1, 1933, to the Federal Reserve in return for $20.67 of paper money per troy ounce.

Violations of this order would be punishable by up to ten years in federal prison and a fine of twice the amount of gold that was not handed over to the feds.

Source: Library of Congress

The order was quickly challenged and made its way to the Supreme Court, where it was upheld...with one notable exception: dentists who could own up to 100 ounces of gold!

Interestingly enough, many Great Depression-era photos capturing Americans waiting in long lines at banks were often characterized as people waiting to get their money out.

But in many cases, the opposite was actually true, with people standing in endless lines for hours to hand in their gold possessions.

Source: American History USA

Ultimately, outlawing gold ownership was a central pillar that many argue made FDR’s New Deal programs possible. Without the ban, the government itself would have been in violation of its own laws against printing money.

Fast forward to the 1970s, when the U.S. was looking at another crisis in the works.

At the time, foreign governments could trade the dollars they received through international trade back to America for gold at $32 dollars per ounce.?

But with a trade imbalance and a ballooning federal deficit causing gold to drain out of its reserves, President Richard Nixon took the dollar off of the Gold Standard, allowing the dollar to float freely against other currencies.

Yet the prohibition against gold continued to stand until 1974.

But after being swayed by a pro gold advocate he saw on TV, President Gerald Ford reversed FDR’s executive order and legalized gold ownership.

This piece of history is often discussed in crypto circles and recently made a resurgence, with some commentators mentioning that in a post-COVID-19 economic environment, such a scenario could very well happen again.?

Could governments ban gold today? Or even ban Bitcoin?

For example, last year Bridgewater’s Ray Dalio wrote:

“If history and logic are to be a guide, policymakers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.”

Ray Dalio also mentioned that he believes there is a “good probability” that governments will try to ban Bitcoin.?

It’s certainly worth reflecting on whether a government could ban Bitcoin.

In theory, at least, banning Bitcoin could be easier than banning gold.?

For instance, unlike gold that one can physically hide, Bitcoin transactions are traceable, meaning governments could trace it back to their owners using some of the tools available in the market today along with the quasi omnipresence of KYC requirements at crypto exchanges.

This is particularly the case when it can be argued that buying Bitcoin in countries like the U.S. is probably easier than buying gold.

In less than 5 minutes, anyone in the U.S. with a credit card can open an account at a crypto exchange or platform and buy Bitcoin.?On the other hand, buying gold could be a bit trickier, as it would require someone to open a brokerage account or physically go to a pawn shop, for example.

In addition, many recent regulatory efforts, from the EU to the FATF, have focused on crypto wallets (including self custody wallets) as well as decentralised finance.

Whilst initially it could have been argued that citizens could always have the option to self custody their crypto assets (and thus be able to hide their crypto assets somewhat like hiding a bar of gold under your mattress), the KYC requirements on those wallets, if they are enacted, could also enable governments to trace them.

The reality is that whilst a certain country could decide to ban Bitcoin, the decentralised and digital nature of crypto assets make it difficult to do so.?

For example, whilst crypto trading in China has been banned for a couple of years now, the reality is that many Chinese users can simply buy and sell crypto peer-to-peer. A lot of crypto trading also takes place on crypto platforms offshore or simply on permissionless DeFi platforms.

In addition, unlike in the 1930s, the world is much more globalized and interconnected today. Even if a large economy like the United States banned Bitcoin, users would have many options to find other venues in other jurisdictions where they could interact with digital assets.?

It could be argued that due to these practical difficulties, governments may try instead to tax the asset rather than outright ban it.

Many crypto investors could then simply pay the relevant tax and have peace of mind.

As a matter of fact, and as we have covered in previous issues of this newsletter, every American is now asked on their annual tax return whether they have made any crypto investments.?

And countries are getting better at taxing Bitcoin and other crypto assets.?

For example, a recent survey showed that an increasing number of countries are coming up with tax guidance on crypto.?

Source: PwC

Many today are not aware that the U.S. government banned gold in the past century. Whilst the chances of a democratic government banning Bitcoin are very low, this is a topic worth reflecting on as we think about the future of money and the potential benefits that a decentralized cryptocurrency like Bitcoin provides.

Powered by Celsius

This newsletter is powered by Celsius, your home for crypto.

With Celsius, you can easily buy, swap, earn, borrow, and send crypto all in one app – with zero fees, the best rates in the industry, and unbeatable customer support.

Earn up to 17% APY on your crypto.

Get a 1% APR crypto-backed loan.

Swap coins without gas fees or slippage.

Send and receive crypto for free with CELpay.

Get help from a real human when you call their Customer Care Center.

Visit celsius.network to get started today.

—

My Latest Podcast Episode

Why might play-to-earn games like Axie Infinity fail?

What mistakes are crypto firms making when targeting gamers?

I cover it all with Paul Dawalibi, CEO of Holodeck Ventures.?

You can listen to/watch the podcast here:

Spotify: https://spoti.fi/3KfHDBX

Apple: https://apple.co/37kFyWY

Google: https://bit.ly/3jadND0

YouTube: https://bit.ly/3NMaDnj

—

Enjoyed this content? Make sure to subscribe or share it with a friend! A new Future of Money newsletter will be in your inbox each week!

See you all next week!!?

Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind.?